In our recent note, “JACK HITS A SPEED BUMP”, we outlined our reasons for turning cautious on the stock given its outperformance versus the S&P 500 YTD. Qdoba’s disappointing performance was the key factor that moved us to change our stance following 2QFY13 earnings results. 



Qdoba Issues Not Transient


Having dedicated further time to Jack in the Box, since the May 15th earnings release, we have come to the conclusion that the issues facing Qdoba are most likely related to the location of its stores than a lack of brand acceptance among consumers. Tim Casey, the new president of Qdoba, was hired in March 2013 and has been given free rein to make the necessary changes to move the concept toward greater profitability and growth.


Over the next three-to-six months, we believe there is a high likelihood that Qdoba restructures its operations by closing stores and, perhaps, exiting certain markets completely. Currently, Qdoba has system stores in 44 states and others in Canada. Of those 44 states, 16 have 5 stores or less and generate lower-than-satisfactory returns due to the unit base being below the critical mass needed to raise brand awareness over the near-term. It’s difficult to say, at this stage, what number of Qdoba stores should comprise the system or which states or markets should be exited, but it is clear that significant changes are needed.



JACK Mgmt More Objective Than Most


Management teams tend to form a strong (almost unconditional) sense of allegiance to their own ideas but we believe that the executives in San Diego will attack the concept’s shortcomings with appropriate rigor.





From early 2012 until last week, we had described Qdoba as a call option for shareholders given the concept’s long-term growth potential. We still believe the upside potential in the stock, due to Qdoba’s growth potential, is perhaps 30% or more, but our confidence in shareholders realizing that return over the next three years has diminished. 


If or when the company moves to restructure Qdoba, we believe the impact on the stock could be a negative over the short-term but, ultimately, the decision will pave the way for the brand’s profitability to be improved, allowing investors to become more confident in assigning it a growth multiple. 



Howard Penney

Managing Director


Rory Green

Senior Analyst


C'est L'Asymmetry!

This note was originally published at 8am on May 07, 2013 for Hedgeye subscribers.

“C’est la dissymetrie, qui cree le phenomene.”

-Pierre Curie


Translated, what French Physicist (1859-1906) Pierre Curie meant by that was asymmetry creates evolutionary change. He and his wife, Marie Sklodowska-Curie, won the Nobel Prize in Physics in 1903. Their lesson needs to be re-learned by market participants, every day.


I’ve always been trying to re-learn. While you cannot tell by my last name, I’m French too. I’m at least half-francophone (French Canadian). My Mom’s side of the family is French as a first language (Les Thiboutots). I didn’t learn how to properly read, write, and do math in English until the 6th grade. That explains partly why I am slow to grasp British concepts like Keynesian economics.


Markets don’t care about what you or I know. They are going to do what they do, irrespective of our respective market positions. That, alongside the non-linearity of it all, humbles me, daily. C’est L’Asymmetry, mes amis. That’s de stuff we want to be looking for, eh.


Back to the Global Macro Grind


Professional Top Callers (#PTCs) have been calling for the top in stocks for a good 3-6 months now. To be fair, maybe when they said sell in May, they meant to tell you it was going to be from the all-time closing high of 1617 in the SP500 (yesterday). They nailed it. I’ll piggy back on their call and tell you to sell some too this morning (SP500 is immediate-term TRADE overbought at 1621).


Maybe they meant sell Treasuries in May? That would’ve been a more asymmetric call. Given that long-term US Treasuries just made another lower-high (vs her all-time closing high of November 2012), at least there’s a case to be made for the final Bernanke Bubble to start popping now; especially if we’re right on US employment, housing, and consumption #GrowthAccelerating.


Now that many of the well bandied about bearish “catalysts” of 2013 haven’t panned out (sequestration, Cyprus, etc.), our channel checks are revealing more creative ones like Cicadas (locusts). Hedgeye Senior Jedi Analyst, Christian Drake, reminded me yesterday that 2013 is year 17 in their seventeen year hibernation cycle. The cicada cacophony is set to potentially engulf the East Coast.


In other news, 2013 is also the 100 year anniversary of the Fed (US Federal Reserve Act of 1913). In order to celebrate:

  1. The US Dollar has finally had it with being devalued to a 40 year low (2011)
  2. The price of Gold has finally had it with going up (every year since 2001)
  3. The Japanese, Europeans, and now Australians are opting to devalue

I’ve written this many times before, but it’s worth mentioning again – if the US Dollar were to continue to breakout from her 40 year low, this will be the most asymmetric move you have seen in Global Macro since the 1990s.


So, you don’t want to miss that.


Markets certainly aren’t missing what was long considered the improbable (#StrongDollar) becoming increasingly probable. There are two causal factors driving this (absolute and relative) - both have had big news in the last 3 trading days:

  1. ABSOLUTE - #StrongDollar gets stronger as US employment growth surprises on the upside
  2. RELATIVE – the Australians joined the Europeans, cutting rates overnight to a record low (2.75%)

Hindsight is now becoming crystal clear and consensus is actually going to where the puck is going this morning:

  1. Australians cut rates
  2. AUS/USD breaks TREND support on the news (only 8 of 29 “economists” expected the cut)
  3. Gold falls -0.7% to the lows of the day ($1459/oz)

Makes sense. Or does it? And to who?


I see a lot of #AngryBugs (Gold Bulls) trying to justify their long gold position (which is -13% YTD) with the same thesis – “everyone is printing money.” Got it. But that’s not what really matters to Gold right now. What the market is saying matters is that if the Japanese, Europeans, and Australians devalue, that’s bullish for the US Dollar, and bearish for Gold.


If you disagree, that’s fine – that’s what makes a market. This is what the market is telling us on the USA vs Gold relationship:

  1. On a 6 month duration, the inverse correlation between USD and Gold is -0.72
  2. On a 6 month duration, as US Treasury Yields (10yr) have made higher-lows, Gold has made lower-highs
  3. On a 6 month duration, US employment, housing, and consumption growth have been inversely correlated to Gold too

Is it interconnected? What kind of asymmetry do you think you get if Hedgeye is right (and Bernanke wrong) on the US unemployment rate? Remember, the biggest risk to Bernanke’s policies has always been his forecast. He still hasn’t signaled to the market that the US economy could see a 6% handle on the unemployment rate in 2013-2014 (he’s forecasting 2016-2017).


I know. No one thinks anything about Fed policy will change until he leaks it to his boys. While that may be true, also remember that A) markets front-run the Fed and B) no one has an edge on delaying economic gravity. The US Dollar, Gold, Stocks (and maybe even Treasuries now that it’s May) are signaling it might be time for Bernanke’s policies to change. C’est L’Evolution!


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1417-1490, $99.04-105.95, $81.56-83.11, 97.61-100.43, 1.71-1.82%, 12.43-14.07, 942-963, and 1595-1621, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


C'est L'Asymmetry! - Chart of the Day


C'est L'Asymmetry! - Virtual Portfolio


The Macau Metro Monitor, May 21, 2013




Macau Composite CPI for April 2013 increased by 5.24% YoY and increased by 0.88% MoM.



The director of the Maritime Administration, Susana Wong Soi Man, said there will be a “minor delay” in the completion of the new Taipa ferry terminal.  Wong said work on the terminal was meant to be finished by the middle of this year, but that she now hoped it would finish in the second half. The construction progress "somehow lagged behind due to several factors including the weather, namely rain".

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TODAY’S S&P 500 SET-UP – May 21, 2013

As we look at today's setup for the S&P 500, the range is 31 points or 1.16% downside to 1647 and 0.70% upside to 1678.                   










  • YIELD CURVE: 1.72 from 1.73
  • VIX closed at 13.02 1 day percent change of 4.58%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 11am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector
  • 11:30am: U.S. to sell 4W bills
  • 11:30am: Fed’s Bullard speaks in Frankfurt
  • 1pm: Fed’s Dudley speaks in New York
  • 4:30pm: API energy inventories


    • Apple CEO Cook appears before House Permanent Subcmte on Investigations to talk about offshore profit shifting, tax code alongside Apple CFO Peter Oppenheimer and Tax Operations Head Phillip Bullock; Cook said he’d present tax code simplification ideas at hearing, 9:30am
    • IRS Acting Commissioner Steven Miller, Treasury’s IG for tax administration, J. Russell George, Former IRS Commissioner Doug Shulman testify before Senate Finance, 10am
    • CME Chairman Terrence Duffy, ICE CEO Jeffrey Sprecher testify before House Agriculture Cmte on future of the CFTC, 10am
    • Financial Industry Regulatory Authority annual conf., 9:30am
    • Congressional Progressive Caucus holds discussion on wages in federal contracts, 3pm
    • Treasury Sec. Jack Lew speaks to Senate Banking Cmte on Financial Stability Oversight Council’s annual report. 10am
    • House Financial Svcs panel hearing, “Qualified Mortgages: Examining the Impact of the Ability to Repay Rule,” 10am
    • SEC Commissioner Daniel Gallagher speaks at meeting of Women in Housing Finance, 12pm
    • House Financial Svcs panel holds hearing on Dodd-Frank’s conflict minerals provision, 2pm
    • BSA releases study on piracy’s economic impact on govts
    • NIST Director Patrick Gallagher, others testify before House Energy and Commerce Cmte on cyber threats and security, 10am


  • JPM shareholders vote whether to split chairman, CEO roles
  • Apple CEO Cook, other execs testify today in D.C. on taxes
  • Sprint to give Dish nonpublic data as Softbank grants waiver
  • Clearwire holder vote on Sprint may be postponed: NY Post
  • Dish chairman Ergen said to bid $2b for LightSquared assets
  • Death toll from Oklahoma tornadoes rises to 91
  • Ex-McKinsey exec. Gupta to appeal insider trading conviction
  • Boeing open to increasing production rate for 787, CEO says
  • Microsoft to unveil new Xbox at event in Redmond, Wash.
  • IRS tax-exempt scrutiny to be subject of Senate cmte hearing
  • IRS ex-official Shulman withdraws CBOE board candidacy
  • Carnival says lower prices forced earnings forecast cut
  • Yahoo to expand in NYC with new Times Square office
  • NetJets CEO says U.S. leading demand for private flights
  • Grifols to buy 35% of Aradigm after latter’s capital increase

EARNINGS: (all times ET, times are approximate)

    • Home Depot (HD) 6am, $0.76 - Preview
    • AutoZone (AZO) 7am, $7.21
    • Medtronic (MDT) 7:15am, $1.03 - Preview
    • Dick’s Sporting Goods (DKS) 7:30am, $0.48
    • Best Buy (BBY) 7:31am, $0.24
    • Tidewater (TDW) 7:51am, $0.61
    • Saks (SKS) 8am, $0.18
    • TJX (TJX) 8:32am, $0.62
    • Intuit (INTU) 4pm, $2.93
    • Analog Devices (ADI) 4pm, $0.52
    • NetApp (NTAP) 4:01pm, $0.68
    • Compuware (CPWR) 4:05pm, $0.05


  • Gold Declines in London as U.S. Stimulus Outlook Curbs Demand
  • Platinum Buying Quickens as Gold Allure Diminishes: Commodities
  • WTI Crude Trades Near Seven-Week High as Stockpiles Seen Falling
  • Copper Swings Between Gains and Drops Amid Concern About Supply
  • Corn Declines for Second Day as U.S. Farmers Accelerate Planting
  • Palm Oil Seen Dropping by Mistry as Output, Stockpiles Climb
  • Freeport Mine Death Toll Rises to 21 as Indonesia Reviews Mines
  • Hunan Rice Sales Plunge as China Probes Cadmium Contamination
  • Crude Supplies Decline a Second Week in Survey: Energy Markets
  • Brazil Coffee Growers Seek Price Review From ICE Futures U.S.
  • Adaro Chief Says Coal at $100 a Ton New Normal: Southeast Asia
  • ThyssenKrupp Woes Tarnish 99-Year-Old Steel Baron Beitz’s Legacy
  • Gold-Silver Price Suggests Stocks to Snap Gain: Chart of the Day
  • Cocoa Gains in London as Pound Nears Six-Week Low; Sugar Falls






















The Hedgeye Macro Team











The Waterfall

“A system can become locally ordered at the expense of a global increase in entropy.”

-Eric Chaisson


First, my family’s thoughts and prayers go out to the those personally affected by the natural disaster in Oklahoma.


Last week I wrote a note titled Sovereign Yield Risk that generated a lot of feedback. Since we put the Hedgeye platform at the heart of a wide open global network, feedback has become our greatest asset. Our research team has its own internal pipes of communication, but they don’t work unless we connect them to our client pipes and the new highway of dynamic information flow: #Twitter.


Both information and asset allocation flows matter to us, big time. Alongside price and volatility, they are critical factors that help us risk weight the probability of new bursts of entropy into the Global Macro matrix. Japanese Government Bond Yields breaking out above our long-term TAIL risk line would qualify as a new burst; so would a move toward 2.4% in 10yr US Treasury Yields.


Back to the Global Macro Grind


The recent 1-month move in both JGBs (we’re short them) and US Treasury Yields are 2 of the 3 most important things in my notebook this morning. The 3rd is gold. And all 3 of these major macro factors are interconnected to a causal factor with a catalyst.


Let’s review what I am looking at this morning:

  1. Japanese Government Bond Yields (10yr JGBs) = up another +5 bps to 0.89% this morning; +31bps in the last month
  2. US Treasury Yields (10yr) = up +1 basis point this morning to 1.96%; +25bps in the last month
  3. Gold continues to crash from its 2011 #BernankeBubble top, backing off -0.5% this morning after a 1-day dead cat bounce

As always, contextualizing these moves across our multi-duration model matters too:

  1. JGB long-term TAIL risk line = 0.81% (so we’re breaking out above that)
  2. UST 10yr long-term TAIL risk line = 1.82%
  3. Gold snapped its long-term TAIL risk line of $1681 in January (not new)

You can ignore the entropy associated with 1 or 2 of these TAIL lines snapping (I hope you didn’t ignore our Gold signal 6 months ago), but it’s really hard to ignore all 3 of them; especially when the mother of all bursts of entropy (#StrongDollar) is in motion.


What matters most in macro is what happens on the margin. That’s why Ben Bernanke acknowledging what we have been signaling on employment, housing, and consumption #GrowthAccelerating will matter in his testimony to Congress tomorrow. That’s your catalyst.


To be fair to the #EOW (end of the world) guys, their thesis remains what ours was during Bernanke’s 2010-2012 QE marketing campaign. Consensus doesn’t think we will ever have real (inflation adjusted) growth in the USA again primarily because QE didn’t deliver it.


Ironically, but not surprisingly, the end of QE is the economic catalyst we’ve all been waiting for. #StrongDollar, Strong America.


To review the flow show:


1.       Expectations for incremental QE fade

2.       #StrongDollar manifests; Gold crashes

3.       Bond Yields rise


Like the thermodynamics of water flowing toward (and over) a damn, the flow show is happening in a locally ordered pattern – and the global burst of entropy (the waterfall) is going to be very hard to stop.


I don’t think mother Merrill explains flows this way, but that’s cool – I just want them to keep telling their clients to sell Gold, Treasuries, and Japanese Government Bonds so that they don’t get run-over by the only centrally planned bubbles that are left.


Mr. Macro Market gets this – look at the most recent burst of immediate-term entropy (3 week correlations): 

  1. US Dollar vs SP500 = +0.91
  2. US Dollar vs 10yr UST Yield = +0.92
  3. US Dollar vs Gold = -0.87

And since 3 weeks don’t matter to “long-term” investors, what if you contextualize 3 weeks within a 6 month TREND?

  1. US Dollar vs SP500 correlation (on a 6 month duration) = +0.79
  2. US Dollar vs 10yr UST Yield correlation (6 months) = +0.11
  3. US Dollar vs Gold correlation (6 months) = -0.78

In other words, one of these 3 things (UST Treasury Yields) does not look like the others (SP500 and Gold) on a 6-month duration, yet. But that’s precisely the risk management point – the probability of US Treasuries and JGBs correlating with #StrongDollar at an accelerating rate is now going up, not down. That’s new.


Can Bernanke not acknowledge both the economic growth stabilization of the last 6 months and the recent acceleration in US employment, housing, and consumption growth? Sure. I can have some IRS dude tell me the sun doesn’t rise in the East too – but that doesn’t mean I (or the market) has to believe them.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $101.27-105.31, $83.49-84.75, 101.42-104.48, 1.90-2.02%, 12.22-13.79, , and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Waterfall - Chart of the Day


The Waterfall - Virtual Portfolio

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